Part 1 : Is it time to re-position Travel Retail?

A while back I said that I would write about the biggest question facing Travel Retail right now. With recent events, it has become ever more necessary to bring that question to the fore and debate it. Today, I want to put that question on the table.

Is it time to re-position Travel Retail?

What are the reasons for considering re-positioning the channel?

Shoppers do not understand what “Travel Retail” is

The market has moved on in the last 20 years

Digital is a significant threat making price positioning irrelevant

Currency fluctuations make pricing a challenge

As an industry, retailers are flying into stormy weather. In fact, we could almost consider it to be the perfect storm. Retailers are dealing with:

Ever higher concession charges driven up by the competitive nature of retailers.

Pricing pressures driven by Amazon and online retailers

Demands from landlords to be the cheapest place to shop

The push for unique experiences driving additional cost in terms of developments

Media regularly focuses on airport pricing and eroding the “value for money” message

Not the easiest market to be trading within I am sure you will agree.

So, let us consider the points above in a little more detail:

People Do Not Understand What “Travel Retail” Is
There is certainly no need for an expensive research study to tell you that passengers do not really understand the term “Travel Retail”. In fact, they struggle to get their heads around “Tax Free” and “Duty Free” too. In fact, even the press gets confused.

Next time you are in Starbucks, strike up a conversation with someone in the queue and ask them if they know what “Travel Retail” is. You get a variety of answers ranging from “selling holidays” to “selling bus tickets”.

The Market Has Moved On
Well, it has and it hasn’t. It used to be about cheap booze and cigarettes. Now there is a whole range of categories available, all competing for a “share of wallet”. The industry has premiumised to drive growth through increased transaction values. Somehow it doesn’t seem to be the place to be getting your cheap bottle of vodka.

Digital Is A Significant Threat
Firstly, I do have to say. I believe that Digital needs to be taken off its pedestal. Digital is not the panacea everyone thinks it is. It IS however, another tool to convey a message or story to the shopper.

Anyway, if Digital is the wonder tool… why is it also such a threat?

Well, Travel Retail’s price based positioning is being eroded. As soon as you put yourself out there in the digital space with a shoppable catalogue you are instantly in competition with Amazon and others.

Amazon has a highly aggressive strategy to drive people to their site. Margins are super slim in the hope that volume and therefore share will win the day in the end. Their focus is very much on encouraging people to do all of their shopping with them or in other terms “share of wallet”. So, aggressive pricing, next day delivery (next hour for some products in some trial locations), broad range supported by small and large businesses who operate within the Amazon Marketplace have the products and are ready to ship.

This brings into question the validity of having a competitive pricing positioning. Is the race to the bottom (cutting prices to be the cheapest) a sensible approach for our channel? The reason I ask this question is because concession fees are getting higher and higher. The increasing demands on the retailer cost structure are spiralling upwards while there is pressure for price to spiral downwards. At what point will those 2 pass each other? The likes of Amazon and other online retailers have super-efficient distribution centres and no stores to manage with their subsequent costs.

An example of this was flying through an airport and Jill decided to pick up a gift. It was a bottle of perfume. She decided to check prices on the net to find the exact same product was on Amazon for £25 (factoring in exchange rates etc) cheaper than the airport store. Did she buy? No. Would she have bought? Maybe…. I will cover this in more detail in part 2.

The key question this raised for me is at what point will stores go under? I say stores because, if you take a look at Direct Store Profitability, retailers probably have a few stores in their portfolio that actually lose money. If they only operated those stores, they would be out of business pretty quickly. The retailers often have to operate stores under the waterline to be able to run a whole concession.

Retailers can be like the proverbial iceberg!

Currency Fluctuations
Over the last 5 years or so we have seen some very distinct currency fluctuations. The most recent has of course been the fluctuation in Sterling with Brexit. This has had a knock on effect on global currencies. In our channel, this makes life complicated not only for shoppers but also for brands and retailers too. We spoke to one traveller who said that their Sterling was denied at a Bureau de Change in Singapore because “they didn’t know what the currency would be worth”.

The complications get worse if landlords require cheapest comparable prices as it may be currency fluctuations that force retailers to lower prices to compete. Is this practice sustainable in the long term?

Concession Fees
The point I made regarding currency fluctuation moves us nicely into the whole topic of concession fee’s. With retailers competing for key locations, the tenders are getting higher and higher. The desire to outbid to capture strategic locations can be all consuming. There is a temptation to leverage the promise of future passenger growth the fund the short term hit to the bottom line. I am sure that there is a location or 2 that is seen as a strategic concession to have but it a real hot potato. Retailers may be keen to acquire it but once they get it, they are keen to lose it.

Of course, airports will want the best possible price for their retail space. That is only natural. However, this may result in poor results when the shopper experience falls. Airports cannot have everything – lowest prices, high quality experiences and maximum rental rates.

At this trajectory, the next stage of the concession evolution could be key airports kicking out their existing retailers in favour of running the location for themselves. Then, once their in-house retail business has been established, it would be sold on to a travel retailer for a tidy profit.

In short, the existing business model, I believe, is not sustainable in the long term.

Let’s Recap
We have covered a lot of ground in the points above but the key themes are as follows:

Shoppers and passengers do not understand our terminology (even the media get it wrong!)

It could be argued that the terms “Duty Free”, “Tax Free” and “Travel Retail” are becoming less relevant as Digital retail continues to take hold in the life of every day shoppers. The prices they offer are often lower than “Tax Free” prices.

Ever increasing cost structures make it difficult to reduce prices.

Reduced prices mean a reliance on growing Conversion and Volume (a difficult task in categories that have restrictions such as Alcohol & Tobacco).

So, I come back to my question, Is It Time To Re-Position Travel Retail?

In Part 2, I am going to cover 3 key areas for discussion in relation to re-positioning our channel: